Over £3.5 billion worth of government contracts with big energy firms, intended to keep the lights on, are currently hanging in the balance.
This month the European Commission is expected to decide whether the so-called Capacity Market is allowed under State Aid rules.
If it doesn’t give clearance, the lights won’t go out, but we will need a big rethink about how Britain keeps its electricity system secure.
The story of how we got here is important for its lessons: how lobbying by big incumbent energy firms influences policy, how both incumbents and government get stuck in old, backward-looking ways of thinking, and how all of this blew up in their faces.
Most of all, it points to the need for new ways of making energy policy if we are serious about hitting the net-zero target for 2050 adopted this year.
The Capacity Market was introduced in 2013 as part of package of changes in the electricity sector.
It was aimed at ensuring there would be enough investment in resources to keep the lights on when wind and solar were not generating, by offering payments just for being available.
For both the energy industry and the government, ‘resources’ meant big power stations.
The government hoped that the Capacity Market would lead to new gas power stations being built. In fact, 90% of the £3.8 billion worth of contracts so far has gone to existing large scale power plants owned by the big six and other large power companies. This includes some coal-fired power stations that might otherwise have been retired.
Things could have been different. Even at the time, there were voices calling for the Capacity Market to be used to develop emerging technologies, like battery storage, and practices, like demand side flexibility.
There was a lot of rhetoric from ministers about these possibilities at the time. But, rather than a forward-looking policy, we got a mechanism that effectively subsidises the past.
How did this happen? Detailed research I have undertaken over the past three years shows a significant amount of evidence that a group of the big generators lobbied government throughout the development of the Capacity Market, from small intimate dinners with ministers, to formal meetings with officials, to bombarding consultations with the same shared messages.
It seems they were particular influential in shaping the design of the Capacity Market to ensure that they would all be able to access it.
There is also evidence that they changed how the Capacity Market was to be funded in ways that worked against the development of demand side response.
Crucially, over the course of 2011 and 2012, the big six also helped create a panic about a forthcoming ‘capacity crunch’, pressing for urgent action to get the Capacity Market up and running as quickly as possible.
Officials in what was then DECC were under huge pressure to deliver. In the course of this rush, they pretty much ignored the concerns of demand side flexibility providers, who were trying to get a fair deal within the design of the market.
Lobbying by energy incumbents is not the only reason why the Capacity Market ended up suiting conventional power stations better than demand response or storage. Officials and industry shared the same set of assumptions about what a ‘resource’ was, and there was scepticism about the ability of new approaches and technologies to deliver system security.
However, in the event, all of this came back to haunt them.
A small demand side company called Tempus Energy brought a case against the European Commission’s decision to grant the Capacity Market exemption under State Aid rules in 2013. The case dragged on, and few expected that Tempus would win. But in late 2018 this is exactly what happened.
All Capacity Market contracts were suspended, and the Commission has had to embark on a new much more thorough investigation of whether the government is paying enough attention to demand side providers, and whether the Capacity Market design is fair to them.
Laying the details to one side, what are the lessons to be drawn from this story?
Lobbying by big companies is inevitable, but it will always tend to make policy making backwards looking, and at present we desperately need forward looking and bold thinking on energy.
We need to think not only about new policies, but also about new ways of making policy.
This could involve setting up new institutions that are less prone to corporate influence – some have floated the idea of an Energy Agency, or an Energy Transformation Council. But it is probably impossible to completely remove incumbent lobbies.
What is crucial, wherever policy is made, is to ensure that those involved in the process are much more aware of, and explicit about lobbying, and being required to tilt the playing field in favour of smaller groups with new ideas and technologies.
The policy process has to explicitly make more space for these actors. Only then will we be able to deliver on our ambitions in time.